Surviving the Audit: A Motor Vehicle Dealer’s Guide to Responding to an Audit
By: Savannah N. Criado
Most, if not all, OEMs reserve the right to conduct an audit of a dealer’s warranty and/or incentive submissions allegedly to “review compliance” with OEM procedures. BSM attorneys routinely work with dealers who are faced with audit and proposed chargebacks. Over the past year, we have seen an increase in audit activity and resulting chargebacks. Note that each state, as well as each OEM, has individual processes for challenging a chargeback – however, these general recommendations will provide the foundation for effectively combating proposed chargebacks.
- Remind Technicians and Employees of Proper Documentation Practices – it is important that dealership employees maintain best-practices in documenting warranty and incentive claims. OEMs frequently take issue with minor technicalities such as mistakes in coding particular repairs or failure to include a miniscule detail. These sorts of errors are low-hanging fruit for a chargeback, which OEMs will leverage. However, these sorts of issues are often addressed in state motor vehicle franchise laws, with protections provided to dealers. For example, in Florida, a chargeback can only be imposed if the OEM can show the claim was false, fraudulent, or there was a failure to substantially comply with the reasonable and uniformly applied procedures of the OEM. Fla. Stat. Ann. § 320.64(25). Because of these limitations, minor technicalities would likely prevent legitimate contentions by the OEM that they are entitled to a chargeback in Florida.
- Retain Copies of All Repair Orders Audited – each repair order that is scanned, copied, or provided to an OEM should be kept in a separate retention folder by dealers and maintained for the greater of one year, the time required by law, or the time required by the OEM’s policies. This allows for easier access in reviewing the individual repair orders in the event a chargeback is threatened.
- Retain Copies of Warranty Submission Requirements or Incentive Policies – in the event a chargeback is implemented for specific policies, gather the handbooks, guides, policies, or bulletins that are issued providing particular instructions on submissions or how repairs are to be completed. This allows dealers to check the validity of any assertions of improper practices or violations of specific policies.
- Conversations Had with Auditors Regarding Findings – the dealership should identify a point person to interact with the auditor. The goal is to limit the ability of the OEM auditor to wander about interviewing personnel. If any meetings are held between the dealership and auditors to discuss a proposed chargeback or the audit itself, taking notes on the information discussed or sending a follow-up e-mail detailing the conversation could provide useful in attempting to reduce or challenge specific debits.
- Understand Your Rights – some proposed chargebacks are minimal with the most cost-efficient solution being payout. However, in the event these numbers are excessive, dealers are not obligated to accept the playing field or findings issued by the audit report. Generally, state dealer acts have particular protections explaining what OEMs are permitted to chargeback for, when they may chargeback for a claim, and/or the burden placed on the OEM in proving they are entitled to chargeback after an audit. As described above, OEMs in Florida are restrained in only being able to issue audit reports with findings of particular categories in order to entitle them to repayment. Responding to the OEM with these franchise protections could result in a lesser monetary finding. As in our experience, when directly confronted with these protections, OEMs typically are willing to negotiate a reduced penalty.
While audits are routine, chargebacks can either be avoided or significantly reduced by proper record keeping, organization, and the ultimate response to the OEM. It is not uncommon for OEMs to wait until legal pressure is applied before they consider a reasonable resolution.